subject: What You Need To Know About Equipment Loans? [print this page] As your business grows to a bigger size, the need for a special type of loan may be felt. There are expenses over and above the normal operational and business development costs. That is the expense over fixed assets or equipment. Whether you need to buy new lighting fixtures, increase the furniture in your office or need to buy latest technical or medical equipment, it can be covered by an equipment loan.
Equipment loan is a loan agreement where you borrow funds to acquire an asset. What's more? In many cases equipment financing is easier than other forms of financing because the asset to be acquired becomes the collateral. The other benefit is that of low obsolescence - obsolescence is the state of being of an object when it is no longer wanted, despite being in a perfect working condition - most equipment (except technological equipment) will typically have low obsolescence. If you think long term, an equipment loan is more suited to you instead of an equipment lease, that's because after making the down payment, you gain ownership of the assets purchased - that way, you have the future flexibility to utilize accrued equity to leverage working capital when needed.
Equipment loans can vary in terms of their borrowing amounts. Equipment financing includes business vehicles, computers, electronic technology, tools, hardware, software, furniture, lighting fixtures or other fixed assets. The amount of the loan depends on the cost of the equipment purchased or refinanced and the advance rates to be provided. Aside from the value of the equipment to be financed, the amount of the loan will depend on the firm's historical and projected revenues and cash flow.
You must be thinking about the difference between equipment loan and equipment leasing and what it means for you - which option is better? Well, both have their respective pros and cons and therefore you should consider all the factors before deciding on any one of them. First, unlike equipment leasing, you will have to pay a significant amount as down payment while taking out an equipment loan - this will make a lot of people pick the former - but the thing to remember here is - while leasing, there is no ownership involved whatsoever so that needs to factor in your decision. Second, and this one tips in favor of leasing - the lessor will take the risk of equipment obsolescence, while taking out a loan - the said risk is yours. Thirdly, equipment that you purchase after taking out a loan will appear as a fixed asset in your balance sheet, not so with leasing. Lastly, lease payments are generally spread out comfortably over time whereas the initial down payment and strict repayment schedule of an equipment loan can put strain on the cash flow.
